From A to UCP E-Book

Kim Sindberg

• Herausgeber: Books on Demand
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 199

Veröffentlichungsjahr: 2016

Beschreibung

This book explains 34 key documentary credit concepts in a clear and simple manner. But not only that; also taking it out of its context – so that one can approach one concept when it is appropriate. The idea is to describe each of these concepts as short as possible (and present them in alphabetic order) – and primarily from the perspective of the documentary credit.

Leseprobe

By the same author:

UCP 600 Transport Documents (2012)

From Beginning to Beginning – Trade Finance Articles from 2003 to 2011 (2012)

The Cheater’s Handbook to Documentary Credits (2014)

UCP 600 Transport Documents – 2nd Edition (2015)

Best Served With Coffee (2015)

In Danish language:

Remburs – en introduktion (2012)

Anfordringsgaranti og Standby Remburs – en introduktion (2013)

Udenlandsk Inkasso – en introduktion (2013)

Under the name Kim Christensen:

Svimmelhedstid, poesi (2006)

In the process of writing this book a number of people, far more knowledgeable and intelligent than myself, have generously offered their time, support and comments. I am thankful for that. Especially, I would like to mention – and express my thanks and gratitude to – Ketty Sindberg, Vijay Kumar and A.T.M. Nesarul Hoque.

Everything should be made as simple as possible, but not simpler.

Albert Einstein

Table of contents

1: Introduction

2: Documentary Credit Crash Course

2.1: Documentary credit definition

2.2: Documentary credit functions

2.3: The independence principle

2.4: The parties to the documentary credit transaction

2.5: Standard for examination of documents

2.6: The Documentary credit lines

2.6.1: Graphic overview of the documentary credit lines

2.6.2: Line 1 – The agreement between buyer and seller

2.6.3: Line 2 – The parties

2.6.4: Line 3 – Issuing the documentary credit

2.6.5: Line 4 – Presenting the documents and paying

3: Advising bank

4: Amendments to the documentary credit

5: Assignment of proceeds

6: Availability

7: Back-to-back credit

8: Charter Party Bill of Lading

9: Collection basis

10: Confirming bank

11: Court interventions

12: Documents lost in transit

13: Drafts – Bills of exchange

14: Examination of documents

15: Franchise or excess (deductible)

16: Fraud in Trade Finance

17: Freight forwarders

18: Green clause documentary credit

19: Issuing bank

20: Language of documents

21: Movements (LCL, FCL, CY and CFS)

22: Nominated bank

23: On board notations

24: Original documents and copies

25: Red clause documentary credit

26: Refusing a presentation under a documentary credit

27: Revolving credits

28: Shipment

29: Signing of transport documents

30: Silent confirmations

31: SWIFT transportation fields

32: Title of documents

33: Trade terms

34: Transferable credit

35: Transport document issued “or order” versus “straight”

1: Introduction

I have worked with documentary credits for more than 20 years. I have often heard the phrase that it is simply amazing how one working with documentary credits can continue to learn; that there is always new topics, angles or questions that pop up. Although I do not disagree with that, I find something else even more amazing: That it simply is the same questions, topics and themes that are still being discussed after 20 years – and in fact more than that. I am sure the individual documentary credit officer, specialist or expert learn – and do get more knowledgeable as time goes by. It seems however that the collective experience within the documentary credit community really does not grow. Sometimes it even seems like it does the opposite: That these years the documentary knowledge disappears from the banks.

Here I will not elaborate on the reasons for that, only observe that this (as an example) can be verified when following the various discussions that goes on at the social media such as LinkedIn or Facebook. Some of the topics raised are so basic, and demonstrating that the person asking have had no structured training or background. This even applies to some of the Queries that are asked to the ICC Banking Commission, which indeed is very sad.

I of course always like a good discussion – and have the greatest sympathy for people who “dare” reach out to the masters for help; who “dare” to ask the silly questions. It does strike me however; how many times I have been answering the same questions.

One may argue that there are many books out there to answer the questions; and that is true. However – if one does not fully grasp the context it may be hard to identify the answer.

Let me explain: Many documentary credit books are structured based on the UCP 600; i.e. walking through the various articles; analysing and explaining them. In order to read such book one must (of course) have a basic understanding of the UCP.

Other books address the issue in a more holistic manner. One of the best (that I know) in this respect is “Documentary credits in practice” by Reinhard Längerich. It links all aspects of the documentary credit – and explains it in context. However; in order to get the full value from this approach, which in fact is rather complex, one must have a solid knowledge in advance.

This is the background on which this book has been written: An attempt to explain some key concepts of the documentary credit in a clear and simple manner. But not only that; also taking it out of its context – so that one can approach one concept when it is appropriate. The idea is to describe each of these concepts as short as possible (and present them in alphabetic order) – and primarily from the perspective of the documentary credit. In a few cases I have given a bit of a background – but in general the intention is to strip the concept down to its core!

It is my hope that this book will bridge the way to reading other textbooks – that will explain the concepts in a more holistic manner. I.e. that it will create an eagerness to understand and learn more… and above all cater for a more qualified discussion.

Kim Sindberg

Køge, April 2016

2: Documentary Credit Crash Course

Let us begin with a quick introduction to the documentary credit, just so that we are on the same page.

Many people consider the documentary credit to be complex, and only use it when it is absolutely necessary. There are many rules, and much “practice” surrounding the documentary credit, but the basic principles of the documentary credit instrument are fairly simple.

This chapter is aimed at providing a basic understanding of what a documentary credit is. The documentary credit described here is a basic one, covering a commercial transaction that involves the sale of goods or services between a buyer and a seller.

Basically, all documentary credits are issued subject to ICC rules for Uniform Customs and Practice for Documentary Credits. The latest version of those rules—the UCP 600— came in force 1 July 2007.

The UCP 600 is a mix of high-level information and very detailed requirements to the documents presented. It includes documentary credit rules on a conceptual level, e.g. explaining what a documentary credit is and the obligation of the parties involved, dictating requirements for the documents that are to be presented under the documentary credit such as explaining who must sign the transport document.

All articles are important for the banks dealing with documentary credits. For sellers and buyers, however, some have only limited relevance while others are essential for the transaction to go smoothly and end successfully for both parties. These are primarily the ones related to the examination of documents.

In that respect, another ICC publication must be mentioned: International Standard Banking Practice for the Examination of Documents under UCP 600 (2013), ICC publication No. 745 (the ISBP 745).

This publication attempts to capture a major part of what is “international standard banking practice,” mainly related to the examination of the documents. It works as a relevant and practical checklist for sellers, who create the documents to be presented under the documentary credit.

2.1: Documentary credit definition

The documentary credit is defined as follows:

Credit means any arrangement, however named or described, that is irrevocable and thereby constitutes a definite undertaking of the issuing bank to honour a complying presentation1.

This includes the following elements:

The documentary credit is issued by a bank – the issuing bank

2

.

The documentary credit is irrevocable, which means that once issued it can neither be amended nor cancelled without the agreement of the issuing bank, the confirming bank, if any and the seller.

The documentary credit constitutes a definite undertaking, i.e. a promise.

In order to evoke the obligation of the issuing bank, the seller or nominated bank must make a complying presentation by presenting documents that comply with the terms and conditions of the documentary credit UCP 600 and international standard banking practice.

Once a complying presentation has been made, the issuing bank must honour. Basically, this means that issuing bank must effect payment as defined in the documentary credit.

2.2: Documentary credit functions

The documentary credit has three main functions:

Guarantee

The documentary credit serves as a (conditional)3 guarantee. This means that one or more banks, in the event the documentary credit is confirmed, issue an independent undertaking. The banks promise to pay a certain amount provided that the documents stipulated in the documentary credit are presented as required by the documentary credit.

The risk of non-payment by the buyer (applicant) is shifted to a bank (issuing bank and confirming bank, if any). Note that the involved banks are not concerned with issues that relate to the agreement between the buyer and seller or for that matter the goods.

Payment vehicle

The documentary credit also manages the flow of money. This means that the buyer does not initiate the payment as he normally would. Rather, the banks that are part of the documentary credit transaction manage payment. Ultimately, the issuing bank draws the relevant amount from the account of the buyer. The payment under the documentary credit satisfies as payment for the underlying transaction.

Financing instrument

The documentary credit is a very suitable means of financing and can be structured in a number of ways. A frequent method is to have the documentary credit available for acceptance upon a complying presentation with payment at a later date. This means that the buyer receives the documents when they arrive but may postpone payment until, for example, 90 days after the goods are shipped.

2.3: The independence principle

One of the core principles of the documentary credit instrument is that it is an independent undertaking.

UCP 600 article 4 distinguishes the commercial contract/agreement from the documentary credit, and makes it clear that the only basis for determining whether or not a bank is obligated to pay under a documentary credit is the documents presented. If they “comply,” the bank must pay; if they do not comply, the bank has the option to refuse to pay.

Further there is the principle that the buyer cannot refuse to pay based on the condition/quality of the goods. The obligation of the issuing bank depends solely on the documents presented.

In addition to evaluating a presentation of documents, a bank examines only the documents as they appear. The bank will not look to other sources, nor look beyond the documents, e.g., to check if the goods are in fact shipped on the vessel mentioned on the bill of lading.

2.4: The parties to the documentary credit transaction

There may be many parties in a documentary credit transaction i.e.:

Advising bank means the bank that advises the credit at the request of the issuing bank. More information about the advising bank in Chapter 3 Advising bank.

Applicant means the party on whose request the credit is issued4.

Beneficiary means the party in whose favour a credit is issued.

Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank’s authorization or request.

More information about the confirming bank in Chapter 10 Confirming bank.

Issuing bank means the bank that issues a credit at the request of an applicant or on its own behalf.

More information about the issuing bank in Chapter 19 Issuing bank.

Nominated bank means the bank with which the credit is available or any bank in the case of a credit available with any bank.

More information about the nominated bank in Chapter 2 Nominated bank.

Presenter means a beneficiary, bank or other party that makes a presentation.

The applicant is usually the buyer, and the beneficiary is usually the seller.

From reading the above it may seem as if there are many banks involved. This need not be the case. Usually there are only two banks:

Buyers bank – the issuing bank is the bank that issues the documentary credit.

Sellers bank – can assume various roles and responsibilities: It can be advising bank which advises the documentary credit to the seller, the nominated bank if it is “invited” under the documentary credit to honour or negotiate, and/or the confirming bank which assumes the obligation to honour or negotiate provided the seller makes a compliant presentation.

It is important that the seller identifies the roles and responsibilities of the banks that are part of the documentary credit transaction.

2.5: Standard for examination of documents

The seller must present the documents in order to obtain payment under the documentary credit. The bank will examine the documents based on the criteria described in the UCP 600. In order for the bank to be obligated to pay the seller, the presentation must be “complying.”

The term “complying presentation” defines the basis and standard for the bank to examine and accept the documents. The definition provides a three level hierarchy:

The terms and conditions of the credit.

This rule specifies the requirements in the documentary credit for the transaction in question.

The applicable provisions of these rules

The UCP 600 governs provided the documentary credit has been issued subject to those rules.

International standard banking practice

International standard banking practice is the practical interpretation of the rules. The documentary credit area has a high degree of documented practice. This practice is available from a number of sources issued by the ICC (International Chamber of Commerce).

More information about complying presentation in Chapter 14 Examination of documents.

A bank will examine the documents based on:

The documents alone, NOT the commercial contract or the goods.

How they appear on their face.

This basically means that banks will not “go behind” the documents and check the facts reflected in the documents. They will merely look at how the documents appear.

The principle that data in a document need not be identical to, but must not conflict with, data in that document or any other document stipulated and presented. This means that the banks will not require a “mirror image,” between documents. Spelling mistakes and missing commas do not make a document discrepant. In addition, the data in a document must be read in context, i.e. the banks examining the documents must relate to the context in which the data in the documents forms a part.

For example, if the “Consignee” field on a bill of lading states “to the order of Bank A,” and the “Consignee” field on the certificate of origin mentions the actual buyer (the applicant to the documentary credit), even though the two documents obviously conflict, they are acceptable. This is because it makes sense that the certificate of origin is issued to the actual buyer and that the bill of lading is issued to the order of a bank with the possibility of passing on the ownership of the goods, via endorsement of the bill of lading, to the actual buyer5.

The principle that if the documentary credit requires presentation of a document other than a transport document, insurance document or commercial invoice, then the documentary credit should state who should issue the document, as well as the contents of the document. If the documentary credit does not, then the document will be accepted if its content appears to fulfil the function of the document.

2.6: The Documentary credit lines

In documentary credit books, brochures, and websites, flowcharts are available that attempt to provide a graphic illustration of how the documentary credit works. I have provided one such chart below:

2.6.1: Graphic overview of the documentary credit lines

2.6.2: Line 1 – The agreement between buyer and seller

This line illustrates an agreement that is formally outside the documentary credit transaction but is the foundation on which the issued documentary credit is based.

The commercial agreement is important because at this stage, parties should begin to consider the documentary credit by, for example, stipulating which documents should be required by the documentary credit. By agreeing on this during the drafting of the agreement, the parties can establish what documents the buyer needs to obtain, and clear the goods for import and detail what the seller is able to provide.

2.6.3: Line 2 – The parties

See 2.4 above “The parties to the documentary credit transaction.”

2.6.4: Line 3 – Issuing the documentary credit

Documentary credit application

The documentary credit is usually initiated by the buyer, who makes a documentary credit application and sends it to his bank. This application has two basic purposes:

1.   It provides the bank with the information needed to issue the documentary credit: The amount, the description of goods, when the goods are to be shipped at the latest and the required documents.

2.   It is the agreement between the buyer (now termed applicant) and the bank (now termed issuing bank).

Issuance of the documentary credit

Based on the documentary credit application, the issuing bank issues the documentary credit and sends it to seller’s bank, with the instruction to advise it to the seller (now termed “beneficiary”).

Once the issuing bank issues the documentary credit it cannot be amended nor cancelled without the consent of the issuing bank, the confirming bank, if any, and the beneficiary (= the seller).

This is because the documentary credit is irrevocable. In practical terms this means that if something needs to be corrected, then the issuing bank (usually based on an application from the applicant) must issue an amendment, which must follow the same path as the documentary credit itself. Once the amendment is “accepted” by the seller (and by a confirming bank if it is a confirmed documentary credit), the documentary credit is amended. If, however, the amendment is refused, then the original documentary credit is still in force. Read more about amendments in Chapter 4 Amendments to the documentary credit.

When there is a confirming bank, and the beneficiary to the documentary credit accepts the amendment but the confirming bank does not, the confirmation is not extended to cover that amendment.

Advising the documentary credit

Once having received the documentary credit, the seller’s bank will advise the documentary credit to the seller. The advising bank signifies that it has satisfied itself as to the apparent authenticity of the credit and that the advice accurately reflects the terms and conditions of the documentary credit (this principle also applies to amendments).

Sellers handling of the documentary credit

After receiving the documentary credit, the seller should read it through carefully to assure that he will be able to fulfil the requirements, create the required documents, and meet all stipulated deadlines.

A major source for problems under documentary credits is that “defects” in the documentary credits are not discovered until the goods are shipped and documents are presented, at which point it is practically too late to make the necessary corrections.

2.6.5: Line 4 – Presenting the documents and paying

The presentation of the documents and payment flow are explained together because of the close link between the presentation of the documents and the payment. It is the presentation that triggers the payment, and in worst case may be to blame for late or nonpayment.

Normally, the seller presents the documents to his own bank. That bank will examine the documents, and if found in order, will pay the seller.

The Seller’s bank will then forward the documents to the issuing bank. If the documents are found to be in order, the issuing bank will debit the amount from buyers account and pay the sellers bank.

There are many variations to this process, depending on how the documentary credit has been structured and the specific role of seller’s bank.

If the documents are not in order, or more precisely, do not form a “complying presentation,” the issuing bank is not obligated to pay. In practical terms, the buyer is contacted if the documents are not compliant, and asked to waive the discrepancies. Fortunately, the buyer usually agrees to waive the discrepancies, and the seller is paid accordingly.

After documents are received and paid or accepted accordingly, the buyer holds the documents that will enable him to obtain and clear the goods for import.

3: Advising bank

In almost all documentary credits there is an advising bank. Often the advising bank will have other roles than that of an advising bank; i.e. it may also be a nominated bank and/or a confirming bank. This chapter will walk through the rules that apply to the advising bank only. For more information about nominated bank and confirming bank please refer to Chapter 22 Nominated bank and Chapter 10 Confirming bank.

In the UCP 600 advising bank is defined as6:

Advising bank means the bank that advises the credit at the request of the issuing bank.

I.e. the core role of the advising bank is to advise the documentary credit/amendment (on behalf of the issuing bank) i.e. to pass on the documentary credit/amendment to the beneficiary.

The advising bank is not obligated under the documentary credit. This means that if a complying presentation is made to the advising bank, the advising has no responsibility to pay the beneficiary.

As such the advising bank has two responsibilities when advising a documentary credit/amendment, i.e.:

To satisfy itself as to the apparent authenticity of the documentary credit/amendment.

What the rule tries to capture is that the advising bank must use its “normal” routines in validating the authenticity of the documentary credit/amendment. I.e. the advising bank is not responsible that the documentary credit/amendment is authentic or genuine; merely that it has “satisfied itself” that it is. If the advising bank is unable to satisfy itself as to the apparent authenticity, it must inform that to the bank from which the documentary credit/amendment was received. In such case the advising bank has the option to advise the documentary credit/amendment, and must inform the beneficiary or second advising bank that it has not been able to verify the authenticity.

That the advice accurately reflects the terms and conditions of the documentary credit/amendment received.

This means that the advising bank must ensure that the documentary credit/amendment that has been sent to it by the issuing bank is accurately advised by it. The phrase “advice accurately reflecting” means that the advising bank is responsible for ensuring that the documentary credit as received by it is advised to the beneficiary with the same content. This however excludes “bank-to-bank information” like instructions to the nominated bank.

The UCP 600 introduces the “second advising bank.” This is relevant in the case where an advising bank utilize the services of another bank to advise the documentary credit/amendment to the beneficiary. The responsibilities of the advising bank (outlined above) apply equally to the “second advising bank.”

The UCP 600 includes the rule that an amendment must follow the same route as the documentary credit, i.e. must be advised via the same parties as the documentary credit itself.